The US Treasury market also showed little pulse at the end of last week's trading, with the 10-year rate trading in a tight 2.23-2.25% range.
Rate changes across the yield curve were less than 1 bp.
CFTC data showed further building of speculative long positions in 10-year futures, with the highest net long positioning in nearly 10 years. This suggests an element of comfort amongst traders that long bond yields are unlikely to rise much from here and might even fall, despite being at the lower end of the current year’s trading range.
The local rates market showed a flattening bias on Friday, with the short end underpinned by expectations of unchanged monetary policy for some time and the long end influenced by falling Australian yields and a well-bid 20-year government bond tender.
10-yr government bond and swap rates ended the session down 4 bps to 2.80% and 3.20% respectively, fresh lows for the year.
Expect a quiet day ahead, with the US, UK and China on holiday and only a couple of central bank speakers worth noting on the calendar. Trump is back home after his first overseas tour, facing further political pressure, so expect US politics to remain in the spotlight.
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Jason Wong is on the BNZ Research team. All its research is available here.
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10-yr government bond and swap rates ended the session down 4 bps to 2.80% and 3.20% respectively, fresh lows for the year.
Oops....
This is something that Milton Friedman also talked about, particularly in 1998 with regard to Japan. He called it the interest rate fallacy, meaning that low nominal interest rates signify "tight" money conditions, or what would be consistent with significant deflationary pressure. It is and remains a fallacy because economists like those at every central bank around the world have decided instead that low rates are only "stimulus."
To correct this view, Friedman pointed out the basic, non-trivial distinction between a liquidity effect and an income effect. Low rates can be stimulative in the short run (the liquidity effect), but over the long run their persistence means something far different. A yield curve is supposed to be upward sloping given the core time value of money and investing. That arises from opportunity cost, meaning the more plentiful the opportunities the greater the time value and the steeper the curve (the income effect). Yield and/or money curves (the eurodollar curve and even the history of the OIS curve) that collapse and remain that way unambiguously demonstrate that "stimulus" deserves only the quotation marks.
Policies that continue to be categorized in that fashion while the interest rate fallacy remains are devoted to the economy that "ought to be", not the economy that is. Read more
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